The merger will create the world's largest supplier of equipment that powers mobile-phone networks, surpassing Ericsson and Huawei.
As part of the deal, Nokia will give Alcatel-Lucent shareholders 0.55 shares in the combined company for each of their old shares, while Alcatel shareholders will own 33.5 percent shares of the company and Nokia shareholders 66.5 percent.
The combined entity will be called Nokia and chaired by current Nokia Chairman Risto Siilasmaa. The combined sales of the two companies last year were about 26 billion euros and post-merger the proposed entity will have a total workforce of about 1.14 lakh.
The two firms announced that the deal is likely to be completed in the first half of 2016 and result in 900 million euros of operating cost savings by the end of 2019.

Another about 200 million euros reductions in interest expenses a year is expected, starting 2017.
"The combined company is expected to have a stronger growth profile than Nokia's current addressable market," Nokia said, predicting a sales growth rate of about 3.5 percent between 2014 and 2019.
This will be the biggest deal in the telecom industry since 1999 when Lucent Technologies bought Ascend Communications for about USD 21 billion and is comparable to Alcatel's purchase of Lucent in 2006 for USD 13.4 billion in 2006.
It will be bigger than Espoo, Finland-based Nokia's record acquisition of map provider Navteq Corp for about USD 8 billion in 2008.
Nokia, which had last year sold its struggling handset business, said it is exploring sale of its HERE mapping unit, which analysts value at up to 6.9 billion euros.
The deal has been worked out to foster innovation capabilities, with Alcatel-Lucent's Bell Labs and Nokia's FutureWorks, the two firms said.
Nokia Group will lead Nokia Corporation with Risto Siilasmaa pegged to serve as Chairman and Rajeev Suri as Chief Executive Officer.
"Together, Alcatel-Lucent and Nokia intend to lead in next-generation network technology and services, with the scope to create seamless connectivity for people and things wherever they are.''
"Our innovation capability will be extraordinary, bringing together the R&D engine of Nokia with that of Alcatel-Lucent and its iconic Bell Labs.''
"We will continue to combine this strength with the highly efficient, lean operations needed to compete on a global scale," Nokia President and Chief Executive Officer Rajeev Suri said in a statement.

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